Sales Compensation

Our blog has moved

2010-01-15T12:36:00.000-08:00

All posts on this blog are now on our new web site at cygnalgroup.com. More Sales Comp Answers are added weekly. Come on over and join in!

Reducing base to bring one sales person into alignment with the rest of the team

2009-11-12T07:43:00.000-08:00

We have one sales rep who was brought in to sell into a different market with a base pay level that is much higher than that of the rest of the team. We have changed our emphasis and he is now selling the same products and in the same role as his 9 peers, but at a higher base. How do we correct his base pay?

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

This one is tricky as you know, and fraught with opportunities to totally undermine the motivation of Mr. Overpaid. Aligning compensation is the fair thing to do (at least internally). However, a transition of some kind might be a nice compromise so here's an idea:

Reduce the base, but fund a guarantee for six months equal to the amount of the base that has been reduced. Then require that the sales person "earn through" the guarantee before additional variable pay is delivered. So let's do an example:

- Current too-high base = $80k
- Appropriate base = $60k
- New target incentive (once base is $60k) = $40k

So you'll need to take $20k out of the base, which is $5k/quarter. The sales person then is guaranteed $20k for the quarter = new base ($15k) + guaranteed variable ($5k). If the person earns less than $5k on the normal variable pay plan, then no additional pay is delivered (beyond the $20k). If they earn $7k (for example), then an addition $2k would be paid.

Continue this for a very few quarters as a transition, then they would be on the regular plan like that of their peers.

Clearly, if Mr. Overpaid is not satisfied with the lower base, he will have a look around during those six months, and may move onto a job that meets their needs for less risk if they can find one. Meanwhile, he has a chance to see what his earnings would be on the new plan and commit to the job with the new compensation arrangement at the end of six months if it works for him. And the company has established a clear endpoint by which the too-high-base will end.

What is the ROI on a sales compensation plans design change effort?

2009-11-11T09:55:00.000-08:00

There are three income statement lines affected by improved sales compensation plans:

1. Revenue - total sales volume can increase with the right incentives. And it can increase with a sales force that isn’t distracted by a complex comp plan and shadow accounting. Revenue can also be increased by focusing sales people on strategically important sales (right customers, right products, long term revenue streams, etc.).

2. Margin – by focusing sales people on the most valuable sales and on correct pricing and deal structure, margin can be increased even if revenue is not.

3. Cost – While this is not typically the focus of sales compensation plan redesign, the cost of comp can be managed down either by paying less to sales people for the same productivity. More often costs are managed down by expecting sales productivity to increase faster than sales compensation. Other costs that can be managed include the cost of administering the plans, cost of delivering the company’s offering (reduced through better deal structure), and the cost of turnover in the sales organization due to un-motivating, unintelligible, or unfair comp plans.

The specific issues faced by the business will determine where the value creation can happen. Ask why you are considering changing their plans, what benefit you expect to gain. Ideally, substantial changes in sales focus that yield business results are the result of a full program that is supported by the compensation plans. It is rare that compensation plan changes alone will make a dramatic difference on the income statement. It is also rare that a change in the market strategy, a change in sales roles, a new coverage model, or other important changes in the sales job will be successful without support from the sales compensation plans. So the ROI is most likely on the overall change initiative of which sales compensation is a part.

Should there be secondary objectives in a sales comp plan?

2009-11-11T06:44:00.000-08:00

Do companies achieve secondary goals like introducing new products or improving the product mix or the average unit price through comp plans? Is it advisable to pursue more than the number one goal of rewarding sales?

Answer:

Most sales compensation plans include more than one objective. In a selling environment with any complexity at all, one objective rarely covers all of "the most important things." Some sales are more valuable than others. These more valuable sales may be literally more profitable (better margin products), or strategically important (solidifies a longer-term relationship with the company), etc.

While I am a passionate advocate for simplicity in sales plan design, most of the plans I have helped to create include more than one component. Examples are:

- Revenue on legacy products, revenue on new products
- Existing customer sales, new customer sales
- First year contract value, out-year contract value
- Sales value (e.g., dollars), margin value (e.g., dollars)
- Individual sales, total team sales
- Bookings, recognized revenue.

Two measures in a comp plan doesn't worry me - it probably means the comp plan accurately reflects the sales priorities. Three measures may be warranted as well. Four measures can sometimes be justified, but usually is not a good idea. Five measures is more than I can recommend.

You can "say" all you want to in a comp plan, but only about three things can be "heard." So three measures is a good maximum, and fewer is better as long as you don't over-simplify the business priorities.

Paying from first dollar for annuity business

2009-11-09T13:25:00.000-08:00

My company is in the throes of revising the comp plan for next year and one of the most hotly debated items revolves around compensating a salesperson on all business generated from dollar one for the life of the account. Currently our firm doesn't discriminate between "new" dollars and what I'm calling "annuity" dollars- they pay the same rate over the account life whether it's 1 year or 10. We don't have a lot of support staff so most, if not all the account maintenance falls on the salesperson's shoulders. Most of the heavy lifting is done during the prospecting stage & within the first 1-2 years of the relationship then the historical pattern is the revenue drops (variety of reasons outside of the salespersons control and some within).

+++++++++++++++++++++++++++++++++++

There are several ways to put together plan mechanics in such a situation, and I have listed a few below, with some commentary.

1. First dollar payment, and “a dollar is a dollar.” This is what I believe you have now. This will focus sales people with substantial annuity business first on maintaining the base, then once that is secure, on growing new business. It generally is straightforward to track sales credit and calculate compensation – both very desirable. The cost of comp in relation to sales volume is very predictable, as is the income level of the sales person. The challenges raised by this arrangement are:

a. It does not recognize the increased degree of difficulty in landing truly new business – so that the time spent on new business development may not be worth the risk of not closing to a sales person who can farm established accounts.

b. It can result in a “phantom base” where the sales person has a large portion of their apparently variable pay that will almost certainly not vary year to year – so they have little real risk or upside in their compensation plan to help support the drive to grow.

c. Depending on how the compensation plans work, it may mean that each deal is paid over the life of the contract based on the comp plan in place at the time it was signed. If this is the case, the compensation administrator may be simultaneously administering several comp plans (this year’s, last year’s, etc.). This would tend to limit the company’s willingness to adjust the plans to focus sales effort on this year’s priorities.

d. Sales people with “rights” to an annuity stream are less likely to accept restructuring of territories to expand the sales force, reassignment of accounts, etc. This can limit a growing company’s ability to scale quickly and maximize market penetration.

2. Added payout value for new business. This is similar to #1, except that the payout on the “existing” business (“existing” vs. “new” needs careful definition) is reduced to fund a higher payout amount on the “new.” Generally the intention will be to keep total compensation the same, but to shift the emphasis to the new business a bit. This can be as simple as an increased commission rate for all new business during its first twelve months, funded by a reduction in the commission rate for existing business. This solves a above, b somewhat, and does very little to address c and d.

3. Split the compensation into a quota-based incentive for the existing business and a true commission on the new business. For the quota-based incentive on existing business, there may be a threshold below which no payout is earned (e.g., 80% of the quota), and dramatic acceleration for any over-quota attainment (e.g., double the target incentive at 120% of quota). For the new business, the payout should be from first dollar and perhaps it should accelerate over quota. In this case, business should count as “new” for the first twelve months, not just for the rest of the plan year. This approach solves issues a, b, c and d listed above; but it also undermines simplicity, makes it hard to know the comp value of existing business on a per-deal basis, and raises the stakes on setting reasonable and accurate quotas for both existing and new business.

There is not a perfect answer to this situation that will satisfy all stakeholders and be bullet-proof. But there are better and worse approaches, depending on your sales roles and your business model.

What expenses are normally covered for 100% commission sales people?

2009-10-28T11:06:00.000-07:00

Assuming the sales people are dedicated to the company (full time, not selling complimentary products produced by a different company), then many companies offer reimbursement for business expenses based on a set policy. The eligible expenses may include mileage, car allowance, cell phone, office space, computer, internet connection at home and/or in the office, office supplies and services (receptionist, copy machine, conference room), insurance and other benefits, training, etc. And some companies do not offer any of these.

The right choice depends on the degree to which the company sees the sales person as a long-term commitment and partner vs. a way to get their offering to market quickly and affordably with as little risk as possible. Earlier stage companies tend to offer less reimbursement (guaranteed cost absorption) as they need to control their selling expense very carefully. They may know they can afford to pay 5% of revenue (for example, and percents may vary widely from that number) to get their offering sold - and they need to hold costs to that level. If that's the case, then a 5% commission makes sense, with no other compensation.

As the company grows and matures, they are likely to want the relationship to their customers to be as much with the company as with the sales person, and so they will want to be more directive about HOW things are sold, what tools are used, etc. As this happens, they will want to invest more in the sales person in exchange for some increased control over a more standard sales process and customer experience. It would be at this point that the variable pay may decrease and the guaranteed expenses may increase - so some expenses may be directly reimbursed, and a modest base pay may be added while the commission rate may actually decrease.

Then at further later stages of maturity, things may continue to change in the compensation plan to reflect the role of the sales person, the market position of the company, the company's business model and economic realities, etc.

How do we pay a 100% commission sales person for the first few months of work? Is a draw a good idea?

2009-10-26T06:23:00.000-07:00

I am assuming from your question that these new reps will be on 100% commission plans eventually (no base). So your question is how to structure the draw to give them some income while they fill their pipeline and get those first few sales.

To be specific enough to be helpful, I'm going to make some assumptions that will almost certainly be wrong for your roles, but you can substitute the right numbers to get your own answers. So let's assume your intended total earnings at the expected level of productivity for the new Inside role is $48k/year, which would be $4k/month. Let's also assume that you're working with a two month sales cycle so that you wouldn't expect a new rep to sell anything the first month; they might sell a little bit the second month; then by the third month they should have some real sales coming in, and really start to hit their stride in the fourth month.

If this were the case, I would recommend a guarantee designed to provide about 2/3 to 3/4 of target compensation. So let's assume it would be 3/4 of target compensation.

First month
Pay $3k as a guarantee (= 3/4 of $4k).

Second month
Assume they might close enough business to earn $1k (1/4 of expected eventual productivity), then pay $2k as a guarantee (= (3/4 of $4k) - $1k they should be able to earn).

Third month
Assume they might close enough business to earn $3k (3/4 of expected eventual productivity), then no guarantee is needed ( (3/4 of $4k) - $3k they should be able to earn = $0).

And from that point on, they are on the standard commission plan.

I suggest making this a guarantee rather than a draw. A draw is a payment advanced against future earnings. If you don't feel they could possibly earn enough to stay with you in the first few months, and if you treat any payments during those months as a draw, then they will start their productive period in arrears, owing the company money. It also gets really crazy to keep up with the calculations.

Some people make the draw non-recoverable, but won't pay any commission in excess of the draw unless the total calculated commission is greater than the draw. This actually incentivizes people to hold orders until they get past their draw period, unless they expect to spectacularly out-perform the draw amount.

Notice that the guarantee amount is less than the compensation level you feel is right for the role. So the message here is that the company is investing in the employee (paying for them to learn to sell and fill their pipeline) while the employee is investing in the company (working for somewhat less than their market value in anticipation of earning more when they are fully productive). But there is no disincentive to sell as much as possible as early as possible, as this will only add to earnings for the employee (and to sales for the company).

In this example, the company has invested $5k in paying a sales person who has not sold anything to earn that. It's a modest investment to start your sales person out feeling supported and eager to sell. However, the new sales person's success at mastering your offering and starting to fill that pipeline with good opportunities should be monitored closely in the first weeks and months to ensure that the guarantee "invested" has the promise of a solid return.

Are claw backs legal when the account is past due?

2009-10-21T13:17:00.000-07:00

Our small sales team is paid 100% commission on gross margin. Sometimes, we claw back commissions that were paid after the customer is past due and in collections, is this legal?

++++++++++++++++++++++++++

I won't venture a legal opinion here -- and believe it is likely to vary from state to state. However, I will assure you that it is common practice to recover commissions paid in cases in which the company is not paid. To be sure you're covered legally, and that everyone knows what to expect, you would do well to document your intention to do that in your compensation plan document. Your plan document should also cover how you intend to handle leaves of absence, terminations, and claim the right for management to change the compensation plan at their sole discretion. Once you have that document in place, have a local lawyer review it, and you'll be all set.

Other ideas for sales measures other than hitting sales quota?

2009-10-21T13:16:00.000-07:00

I'm looking for ideas in revamping our sales comp to include metrics and pay for items other than just meeting a traditional sales quota. Perhaps a bonus for a close rate of XYZ, for example. Any ideas are welcome!

++++++++++++++++++++++++

Our counsel is generally to pay for results, financially measurable results (as opposed to activities). Sales compensation, to be really motivating, generally involves significant cash and upside -- and you want to be sure that those payouts are rewarding sales people for results that more than cover the money to be paid.

With that said, other great measures besides just sales/bookings/revenue generally have to do with the quality of the sales dollar. Some sales dollars may be more valuable to your company than others -- like sales of more profitable products or services, or sales of strategically important new products, or sales into an important targeted industry segment. Also, sales over goal are generally more lucrative for the sales person than those below goal. And consistent sales performance is often valued over sporadic sales performance. These are just a few of many alternatives to just paying on sales. But picking the right one is all about aligning the rewards with what is most important to the success of the business.

Tips on putting together an incentive plan for inside sales

2009-10-21T13:14:00.000-07:00

Any tips for putting together an incentive plan for "inside sales" employees? We are trying to get our employees into a "value-added selling" frame of mind (instead of price-point) and want to provide an incentive

+++++++++++++++++++++++

What type of inside sales are they doing? Do they qualify for the 7i exemption or are they non exempt employee? These questions must be answered because, if they are non-exempt, any incentive earned must be included in their hourly rate. If they are exempt, it would make it much easier to implement an incentive with less administrative costs. Assuming you conclude they are either exempt, or that the administrative burden if they aren't is "worth it," then here are a few tips for designing their incentive plans:

(1) Incentives are a great way to support an initiative to change behavior, but the rest of the initiative needs to be in place as well. This may include training, systems enhancements, coaching and mentoring, etc.

(2) If you really want to use incentives to motivate and excite, they need "carrots and sticks" to be part of them. Over time you will want to migrate base salaries down as a percent of target total compensation so that the target incentive must be earned in order for the employees to maintain market-competitive pay.

(3) The amount of pay at risk depends a great deal on the nature of their inside sales roles. Although it can be more complex than this, one simple division is between jobs that are primarily "inbound" and those that involve more aggressive "outbound" calling. If an inside seller mostly reacts to requests from customers and is primarily doing an order management function (perhaps with some ability to cross-sell or up-sell), then a relatively smaller percent of pay at risk (in the incentive) is appropriate. For outbound inside sales people who more strongly influence a prospect's decision to buy through their own creativity and initiative, more pay at risk (and more associated upside) would be a good idea.

(4) Beyond this, the basic principles of role-based incentive design apply, including:

- Pick measures that are linked directly to income generation for the company

(e.g., revenue, units sold, margin) rather than activity level (e.g., number of calls)

- Pick as few measures as possible to cover the primary accountabilities of the role. One or two would be a good number for a newly-instituted plan. Three might be OK. More than three would have to be well-justified as it dilutes both the message communicated by the incentive plan and the payout value of accomplishing any of them.

- Design the plans with sales leadership's involvement so that they introduce them with a message like, "Here are our new incentive plans. We are thrilled to share them with you because we believe they will significantly increase both your income and that of the company. Let me show you how . . ."

- Provide great materials to communicate the plans -- since the reason you're doing it is to motivate and excite your inside sales people.

- As soon as you have an idea of what the final design may be, start planning for accurate and timely administration of the plans and great reporting. You risk losing much of the motivational value if employees don't see a frequent and easily understood connection between their results and their earnings.

Group commissions where all team members share in a commission on sales made

2009-10-21T13:13:00.000-07:00

My company is considering instituting a plan where all team members would share in a commission on sales made. I'm looking for ideas - how is it structured, are all sales included in the group commission, etc.

++++++++++++++

The key principle that comes to mind here has to do with how the sales are made. Do the team members depend on each other to be successful? If they do, for each sale, then a team incentive where they have a single team target and a single team actual result, all receiving the same payout, makes great sense. If each team member has his or her "own" sales, and also supports the effort of the team, then an individual sales goal and a team goal may both be indicated (usually with a higher weight on the individual goal).

Where do I get started? My new employer wants me to look at the sales comp plans!

2009-10-21T13:12:00.000-07:00

One good place to start is with a book, and I recommend both "The Sales Compensation Handbook" edited by Stockton Colt and "Compensating New Sales Roles" by Colletti and Fiss. In addition, there is a very helpful course offered by World at Work, "Elements of Sales Compensation." And Cygnal will be offering classes in the fall as well in cities around the country. Sales compensation design is exciting and challenging, but it is high-stakes work. There are terrific ways to really create value for your company, as well as wrong answers that can create a disaster. If your company's challenges are significant, a consultant can help.

We are considering putting our Product Managers and Program Managers on comp plans. How should we go about setting it up?

2009-10-21T13:11:00.000-07:00

A few key principles may guide you here:

(1) Be clear on how much and for what measures the managers involved can "move the needle," with a direct effect on the company's financial results. Product Managers could be measured on product line gross margin or operating income, with a similar measure for Program Managers, for example. But make sure the measurement and reporting systems will support robust measurement of their results.

(2) Be sure you have enough incentive to actually motivate and drive behavior towards the results you want. Anything less than about 15% of target cash compensation may not be worth the cost of designing, reporting and administering the plans (in terms of the effect on results). This can be tricky if you are offering incentives for the first time as you probably don't want to reduce base to fund them. If you can redeploy budgeted money from a broad-based employee incentive plan to help fund it, you can bring the pay mix in line over time through reducing the increases in base and putting them towards the variable portion.

(3) Be careful with target setting. You need to aim for about 60% of your employees on variable pay plans to be at or above target, or it won't motivate much.

(4) Offer enough upside. If you are putting people in an at-risk pay
situation, possibly for the first time, you need to be sure a few people really ring the bell and get a handsome payout (1.5-2.0 times the target incentive), and publicize and celebrate these successes -- it helps motivate everyone.

(5) Be sure the people in the role have the risk profile to find this
motivating (or that that is the sort of person you want in the role, and are willing to make the needed adjustments). Not all solid employees are "coin operated."

Where are the sales comp plan samples?

2009-10-19T14:52:00.000-07:00

Many people would like to find a book of sales plan templates -- but there's not one I know of. That's probably because it's sort of like asking for someone to provide a copy of their house plans for your consideration. It could be just the thing for you, but more likely isn't. There are so many variables, so many options -- usually many right answers for most situations, but also even more wrong answers.

There are principles, common industry practices, and a long list of common mistakes. And there's what has worked and what hasn't in your company. All these things, along with your current business imperatives and the role of the sales organization in executing them, will guide your plan design.

What is the right comp plan for the top sales job?

2009-10-19T14:37:00.000-07:00

For the top sales job we sometimes see a sales comp type plan, and sometimes a hybrid between the corporate executive plan and a sales type plan. Which of these two to use would depend mostly on what the sales leader is expected to do as the core role:

a. Run the sales team under the direction of company leadership with a focus on keeping the sales team recruited, coached, and productive

b. Work as a member of the company’s leadership team to set the company strategy, determine how best to address the market for the company’s offerings, and deliver both the needed growth and company financial results.

If most of the time and effort are focused on a. then it’s a sales type plan. If both, the 50/50 sales-type plan and company executive plan. And it’s rarely mostly b. unless there’s an EVP of Sales & Marketing with a VP Sales reporting in.

How should we pay sales people selling ongoing IT outsourcing services with monthly fees?

2009-10-13T13:32:00.000-07:00

For people selling IT outsourcing services (the primary offering), the sales people would normally earn variable pay based on bringing in deals. The question revolves around both the right measure to be used and payment timing, so I'll address those separately:

The right measure/s:

The ideal measure for this type of business is the margin on the deal. Margin rewards sales people for selling profitable business. However, very few companies use this as it is hard to agree on the deal margin, and if cost overruns are frequent you can end up with sales people "helping" you manage the cost side of profitability rather than the price and value side. For these reasons, most use deal value, either total contract value (often abbreviated TCV) or annual contract value (ACV) to measure sales productivity. And generally you do want to pay more for larger deals, which would argue for a payout rate table (typically communicated as a commission). The actual amount of the payout per deal is a function of how much compensation you intend to deliver for at-goal performance and how big the goal is (comp / goal = rate).

Payment timing:

The principle here is that you want to finish paying the sales person for a deal at the point at which you want them to disengage and move on to focus on the next opportunity. So if you just want closed deals, you'd pay after signing. If you want closed deals with nurturing and attention through initial implementation, you might pay 50% at signing and 50% after the first check comes in for under-way monthly service. If you want the sales person staying in touch, finding ways to grow the relationship, etc., then you could pay some (20-25%?) at signing, and the rest over the life of the contract based on recognized revenue.

What is considered "best practice" in how we would recognize and reward sales managers for covering open districts?

2009-09-28T08:03:00.001-07:00

I think the question of appropriate arrangements for sales managers with open positions (/territories) needs to be handled differently in different situations:

For sales managers who are expected to keep their territories fully covered, maintaining a pipeline of candidates and connections, it makes sense to expect them to continue to produce sales out of an open territory, which would mean no quota adjustment, extra credit, etc. Their ability to meet their quota would almost certainly be impaired by an open territory, but then they haven't maintained a full staff - so some penalty is appropriate.

For sales managers who are not expected (or allowed) to hire staff to support an open territory, and who expect to fill the open position within a few months (3-12 perhaps), they could either cover the open territory using others from their team, or cover the open territory themselves.

If they cover the open territory using others from their team, then their team members should receive credit and compensation for the sales to the assigned opportunities (or zip codes) outside their territory, and the manager may or may not need to have a quota adjustment (depends on how long the condition is expected to persist).

If they cover the open territory themselves, then the manager could receive individual contributor type compensation for sales into that territory, but probably at a reduced rate (50% of that generally paid to individual contributors?), and perhaps a somewhat reduced total team quota (again depending on how long the no-hire situation is expected to continue).

For sales managers who are expected to downsize their staff until market conditions change (a year or more), reassigning territories among their team members to "absorb" the open territory is probably the right approach. The quota should be adjusted as needed to reflect the market conditions that led to this change and reasonable productivity expectations for the newly reduced team size.

Do sales incentives actually motivate people for the long run?

2009-09-07T06:56:00.000-07:00

Regarding whether or not incentives actually help at all, the best piece I've read on the subject is Rewards and Intrinsic Motivation by Cameron and Pierce. It's dense and academic in tone, but I've read the whole thing and found that the key points relevant to sales compensation design from the book are the characteristics of effective rewards. According to Cameron's and Pierce's research, incentives and rewards are most effective when…

1) Used for the benefit of the employee (not just to create benefits for the employer)

2) Focused on challenging activities (not on activities that employee sales people already like to do)

3) Tied to specific reasonable, objective, and attainable standards of performance

4) Accompanied by celebration of significant successes by the organization.

In addition they note that, "Reward systems that are discretionary, subjective, or based on pleasing the people in charge are often seen as unfair and coercive. What is 'good' today may not be good enough to earn a reward tomorrow."

There is substantial written work questioning the effectiveness of incentives in creating sustainable healthy motivation. This book takes this question on, focusing mostly on the education and compensation application of the principles.

Are companies adjusting sales comp plans due to the slow economy?

2009-08-10T08:48:00.000-07:00

From our experience, I would say that most companies are making some kind of adjustment due to the economy. If your expected total sales are down, you have several options that we've seen recently:

1. Reduce quotas and...
a. Hold commission rates constant (sales people would then earn less when they hit quota than they did when quotas were higher)
b. Raise commission rates (to keep sales people whole year over year)

2. Hold quotas constant, along with commission rates and...
a. Add earnings opportunities in the form of MBOs or SPIFFs to keep sales people whole and reward them for building for the future (training/preparation to sell complex products or improve selling skills, introductions to prospects who can't necessarily buy this year, but maybe next year,...)
b. Reduce the number of sales people so that fewer people cover larger territories and those remaining can actually have productivity and earnings levels similar to prior years (at a cost that is affordable to the company)
c. Make no changes and expect sales people to under-perform and under-earn, but be ready when the market comes back with sales people to serve your full market potential

Among our clients, we are mostly seeing 1.a. and 2.b. - with ample discussion of the other options.

New Business vs. Account Management roles in Professional Services

2009-08-03T11:16:00.000-07:00

In professional services, do you compensate differently in your sales plans for "new" business vs. maintaining an account to incent your best "prospectors" to develop new business? What are the best and worst elements of plans you have seen that do this?

+++++++++++++++++++++++++++++++++++++++++++++++++++++++++

I'd say that your best course would depend on both the company strategy and the way you have defined your selling roles.

If your strategy is focused on penetration of existing accounts, then the sales you most value might be those in your current accounts (this tends to be true with mature companies who have some kind of relationship already with most of their key prospects).

For the majority of our clients, new business is very important. You'll have to be clear about what counts as "new" - a new "logo" (new company name...), a new buying entity (maybe a new division/location in an established customer could be counted as new), a new service offering (generally one that does not replace an older legacy service they have been buying). Generally "new" business (however you define it) takes more time and effort to win than renewal or penetration business, and for that reason you'll need to reward for it at a higher level in order to keep sales people focused on it.

Another approach successfully employed by companies with enough sales people to do this is to separate "Account Management" from "New Business Sales" so that different people/teams are responsible for those different selling activities. This may not be practical in a small sales force - but once a company achieves enough scale to operate this way it allows the focus of those who love the new business hunt to be where they do their best work, and those who love the longer-term relationships and more nurturing selling role can focus on managing and growing existing accounts. If you do end up splitting the role into Account Managers and New Business Hunters (sometimes called Sale Executives), you will probably want to have different pay plans for those two roles (e.g., quota bonus with a threshold and significant acceleration for over-quota performance for Account Managers; first dollar commission with lower quotas and less acceleration for New Business Sales).

What percentage of annual gross revenue should come from new business?

2009-07-23T07:39:00.000-07:00

I need benchmark data on what percentage of annual gross revenue should come from new business and should be allocated to sales force compensation. For example, if in insurance or other annuities there is a commission on first year premiums only and not on renewal business or a reduced rate on renewals. I assume that the 1st year budget for acquisition is higher than maintaining existing customers, but I am curious is that is really the case or if there are any good benchmarks to use as a reference. Can you help?

++++++++++++++++++++++++++++++++++++++++++++++++++

I believe your question is about sales roles with a new business focus when the acquired business generally turns into a long-term annuity type relationship. Examples from my experience include insurance policies, ASP software offerings, software leasing, online test delivery contracts, EDI services, data and voice communication subscriptions. In all these cases, the company most values the acquisition of new business, and counts on the quality of the service delivered to retain it.

In these business models, new business sold earlier in the year contributes more to in-year revenue than that sold later in the year as the revenue is generally recognized monthly. For this reason, much of the incentive design effort may be aimed at rewarding those who acquire significant new business early in the year by measuring "in-year new revenue." Retention is sometimes the job of the new business sales person, but is often assigned to a different Account Manager or Client Services role. If the same person is doing both new business and account management, the total revenue from new business may be very small compared to the total revenue from the existing assigned book (5% - 20% of the total). Often the new business is commissioned (based on new in-year revenue or total contract value), and the retained business is handled more as a quota bonus, with the weight on each component proportional to the expected time allocation.

But to get to your specific question, the budgeted sales comp % revenue is likely all over the place, depending on industry and company stage of growth. In very high margin businesses (software, data services), you are likely to see a higher comp % revenue. Similarly, large deal sellers (deals in the millions, tens of millions and more) would see a smaller percent of revenue as their comp; and small deal sellers (I've seen deal sizes in the thousands of dollars) would earn a larger percent of revenue. And in earlier stage companies you are also likely to see higher comp % revenue. The right comp % revenue is really based on the market value of the job (numerator) and the selling model, which generates a reasonable sales productivity expectation per person (denominator).

How to handle compensating Territory Sales Managers who have additional responsibility to coach and train new hires or poor performers.

2009-07-06T08:28:00.000-07:00

So just to summarize your previous company history, you have given base salary increases in the past, however, going forward, the duty will be held on a 1-year rotational assignment rather than an on-going responsibility, so you are seeking an appropriate alternative.

First of all, you are wise to avoid adding permanently to the base salary in recognition of a transient responsibility. My suggestion is to provide a separate incentive compensation opportunity based on the sales results of the person being coached. It should probably be about 20% of their total incentive opportunity if you want them to maintain focus on their primary individual selling job. And it should be structured simply. For example, earn 50% of the target incentive if the "coachee" is at least 80% of quota, 75% at 90%, 100% at 100%, 125% at 110%, 150% at 120% or better. I'm not at all sure the performance range here (80% to 120%) is right for your business - so you should adjust those depending on the aggressiveness of your quotas and the predictability of your business.

The next question is whether or not the coaching incentive opportunity should be in addition to their regular comp plan or carved out of it. If they receive a reduced personal quota in recognition of the time they will need to spend on this, there is an argument for a carve-out (reducing their regular comp plan incentive at target to offset the coaching incentive). But more likely they are top performers with typical/healthy quotas, and this is an added responsibility. If this is the case, then the incentive opportunity should be in addition to the regular variable pay plan.

Reducing sales compensation for bad debt

2009-05-11T11:52:00.000-07:00

How do most companies handle sales compensation when there is a write-off for bad debt. Do they charge them back on the cost the company is out, or the gross profit they would have made if the customer paid?

Most of our clients do charge back the sales credit for deals (or portions of deals) that are written off for bad debt. If you are paying based on the sales value, then the sales value is what would normally be reversed. If you are giving sales credit and paying based on deal margin, then the margin value of the deal that was originally credited (or an appropriate fraction of it if the write-off is partial) is what is reversed out of sales credit. The tricky part is whether you reverse either (1) the compensation that was earned on that deal at the time it was credited, or (2) the sales credit for that deal so that it reduces compensation in the measurement period in which the credit is reversed. The right answer to which of these to implement would be based on the detailed mechanics of your compensation plan.

What is the best way to compensate for multi-year maintenance contracts, including Managed Services?

2009-05-11T11:47:00.000-07:00

The first question about the multi-year maintenance contracts is whether the role for which you're compensating is a new business role or an account management role. If its primary focus is gaining new business (new name accounts, or as some say "new logos"), and if there is a capable account/project manager to take the relationship once it's established, then you'd like to pay the sales person relatively close to the time of the signing of the contract for the new business. A typical arrangement might be 50% paid once the contract is signed + 50% paid once the service is stable and the monthly/quarterly fees are coming in (perhaps 3 - 6 months later, or based on achievement of a specific milestone). The sales credit which forms the basis for the payment should take into account the annual value of the contract and the contract term. One common approach is to credit 100% of the first year value + 50% of the 2nd and 3rd years, with less or no credit for terms beyond 3 years. In addition, the expected profitability of the deal may also affect sales credit to the extent that the sales person controls pricing and the profit can be reliably predicted. This doesn't address all the issues around upsells, renewals, contract extensions, etc., which would also have to be addressed.

If the role to which you refer is more of an account manager who lands the business only to manage the account and grow the relationship over time, then the ideal measure is recognized margin (the margin value of the revenue recognized). If margin is controversial or hard to measure or calculate on an account by account basis, then revenue may be the better measure (and it is certainly the more common measure for this reason). In this case, the person may be paid based on attainment of a quota customized for their book, or based on growth in the value of the assigned book over prior years (through more volume to existing accounts or addition of new accounts).

What are some best practices for compensating sales-related positions such as Account Managers, Bus Dev Managers, and Tech Sales Support Specialists?

2009-03-24T14:34:00.000-07:00

You are asking a question that has challenged many companies and over the 12 years I've been in the field I've seen this pendulum swing all the way to one side and back again. As I often tell clients, "the great thing about incentives is they work, the bad thing about incentives is they work" and often they work so well for one set of positions that the company decides if it is good for the sales force it must be good for the whole company, and before you know it administrative assistants are being paid based on number of emails answered. Banking went through this trend several years ago (you may remember being "sold to" by your teller when you were just trying to make a deposit). There was a time when banks considered just about every employee a sales person and had them all on some type of sales incentive plan.

The roles you ask about (account manager, business development manager, technical sales support specialists, and sales engineers) are more in the gray area in terms of eligibility for "sales-type" incentive plans. I would need to know more about the exact job descriptions before I could give an opinion about whether or not the role should be on a sales incentive plan or a corporate-wide plan based on overall company performance as Account Manager (which is a very common selling role title with best-practices all its own in terms of incentive design) may not mean to your company what it means in other companies.

That being said, here is some general guidance that may be of help. If performance in the role is OBJECTIVELY MEASUREABLE on an individual basis and the result of that performance has SIGNIFICANT BUSINESS IMPACT then you should seriously consider investing the time and expense in developing a customized incentive program. If you can't objectively measure individual (or small team) performance and/or the performance impact has limited business impact, then you are better off leaving them on the corporate-wide plan. Developing sales-type incentive plans (often referred to as customized plans for non-selling roles), takes significant time and effort and can be complicated to track and administer. You have to be sure that the resulting change in behavior that you may get from the plan is worth the added administrative expense.

If your Account Managers are individually responsible to manage and grow a defined set of accounts, with objectives such as upselling, retention, penetration, and growth of those accounts then this role should be on a sales incentive plan (but the plan would look very different than plan for a sale reps plan who is out selling widgets every day, and might not use a commission structure at all, but instead use a goal-based bonus approach).
Business Development Managers could be low level lead generators, or could be out closing really large new business deals on their own. My hunch is that it is likely this role would be on a sales incentive plan, but the exact nature would depend on the accountabilities and expectations of the role.

Technical Sales Support Specialists (if this role is similar to what I've seen elsewhere) are often paid using a less variable pay mix (80/20 or 85/15) and are paid based on the results of the sales reps they support. This is also the case for Sales Engineers, although these roles often support the entire sales organization w/o being directly aligned to a team of reps, so their individual contribution becomes even less clear. For these two roles, the line starts to blur between corporate plan and sales plan, and often you end up with a hybrid. Part of their plan is like the corporate plan, but there may be a portion that is tied to the overall performance of the sales team as a whole or the sales region or team they support. There can also be a small individual performance modifier, but this often based on subjective manager evaluation.

How should I go about switching from an annual payout to a quarterly payout?

2009-03-11T10:47:00.000-07:00

While it is generally better to pay as close to the selling event as possible, it is not always the case that more frequent payouts are better. All one needs to do is consider the most extreme circumstance (daily incentive payments ?!) to see how you can have too much of a good thing. When companies are considering switching to a more frequent pay cycle, there are several factors to consider:

1) Is the pay mix changing at all? Often more frequent payments can be a way to alleviate some of the sting of a change to a more variable pay mix (if you have had to make reductions in base salary, increasing the frequency of incentive payments can help your reps meet their regular financial obligations).

2) If the pay mix is not changing, what impact will smaller more frequent payments have on your reps' perception of the incentive program? Will the amount paid still be meaningful or will it get sucked into their regular expense budget and not be as noticeable as a larger lump payment would be?

3) Can your company handle the increased administrative burden of more frequent payments, and what are the limits? Most companies would not find it cost-effective to make daily incentive payments, although I have known some to make weekly payments (against my advice).

4) How will more frequent payments change the reps' behavior - are there any unintended consequences and can these be alleviated through selection of the appropriate design option?

On point 4, there are typically two choices for performance period when switching to payments that are anything other than annual in frequency: discrete and year-to-date (YTD). In all our examples below we will assume the change is from annual payments to quarterly payments, as per the initial question. However, the same logic could work for monthly payments that are on an annual, semi-annual, or quarterly performance period.

We'll start with discrete periods first. In this method each incentive payment corresponds with the end of a performance period, and the next payment starts fresh with the next period. There is no carry-over of performance from one period to the next. This type of plan is common in highly transactional, high frequency selling environments where sales are made regularly and there is little ability for the rep to game the timing of sales crediting. If the rep can control when sales are credited, you will likely see peaks and valleys in performance from one period to the next, where reps are pulling or pushing sales to maximize earnings. If your plan has thresholds (that require a minimum performance before payment is earned) and escalators (where payment increases for increased performance) and you are using discrete periods, you are very likely to experience some of this "porpoising" as reps figure out how to get the most bang for each sale. The end result of this behavior is an overall annual performance that may be below target, while the rep has been able to earn above target pay by using the escalators to his/her advantage in high volume periods. If there is little possibility of this behavior, using discrete periods is the most straightforward mathematically and often the most motivating in the short term for the reps.

The most common solution for this problem is to use a YTD mechanic instead. This requires that performance be tracked against a longer performance period and that each payment is calculated against an annual YTD target incentive amount as well. While the mathematics on this can be a bit daunting at first, once reps and managers understand that pay is not "lost" in a bad period, but may be earned back, they quickly see the advantages. In a typical YTD approach, an annual quota is divided into four even amounts as is the annual target incentive. We'll use $1,000,000 as the annual quota and $10,000 as the annual incentive. A quarterly YTD approach would work as follows:

Q1 Quota: $250,000
Q1 Target Incentive: $2,500

Q2 Quota: $500,000 (Q1 + Q2)
Q2 Target Incentive: $5,000 (Q1 + Q2)

Q3 Quota: $750,000 (Q1, Q2 + Q3)
Q3 Target Incentive: $7,500 (Q1, Q2 + Q3)

Q4 Quota: $1,000,000 (full year)
Q4 Target Incentive: $10,000 (full year incentive)

While there are many ways to arrive at the amount earned as a percentage of target, the common mathematical element critical to the success of a YTD plan is to calculate the percentage of the YTD target incentive earned and then subtract any prior payments already made. This creates the "true-up" which ensures that sales which may fall later in the year still "count" toward the reps overall annual payment. Those who are mathematically astute will quickly see there is a potential for ending the year in arrears using this method. Therefore we recommend capping Q1-Q3 payments at 100% of target, and saving any payments for performance above 100% until the full-year results are in. That way a strong start to the year and weak finish will be less likely to create the need for a rep to "pay back" money already paid.

There are some variations on this approach, which combine different aspects of a discrete plan and a YTD plan. Here are two:

1) Use discrete quarterly periods for payments up to 100% with a year-end bonus that rewards for any full-year performance above 100%. This avoids the need to do the true-up calculation which causes some organizations communication difficulty. It does not, however, eliminate the potential for reps to play with the timing of sales to increasing their earnings, but it reduces it by keeping all the "upside" until the end of the year. As with the traditional YTD approach this also acts as a retention tool for anyone running above 100%. Should they leave prior to year-end they will be walking away from any upside the plan may provide.

2) Software companies sometimes use YTD quotas while paying using a discrete quarterly target incentive. This encourages more balanced performance throughout the year, but puts a pretty high premium on the accuracy of quarterly quotas. If business is steady and/or seasonality is highly predicable, this may be an effective way to get even performance throughout the year (as there is no true-up opportunity, it really does matter more WHEN the sale happens, not just that it happened sometime during the year). There is another advantage to this method in that it puts more emphasis on sales that happen earlier in the year. If a rep can "fill the bucket" as quickly as possible in the year, he/she will have the best chance of being in the "sweet spot" of the plan design (where the escalators are the steepest) for each quarterly payment period. As there is no true-up, there is also no chance of ending the year in arrears. There is, however, the possibility that a rep who starts out slow but ends strong will make less money than a rep who had a very strong start but ended weak. Consider which outcome is better for your business when selecting between the traditional YTD approach and this variation.

Words of caution:
It is common for incentive plans to include hurdles and modifiers. These can become especially challenging when dealing with the traditional YTD plan (using a true up calculation). You must be very cautious to do any modifier calculation AFTER the YTD calculation has been completed and you have the final quarterly payout calculated. Whether the modifier increases or decreases the quarterly payout, you must include the ORIGINAL quarterly amount (prior to modifier) when calculating your next quarter's YTD payout. If your plan has complex calculations including modifiers, hurdles, and any other type of linkage between elements (especially if they are using different performance periods), you should make the choice to use a YTD calculation very cautiously. If it is important to your business to go this direction, you may need to change some of the other elements of your plan design to ease the calculation complexity and ensure your reps have a clear understanding of how they will get paid.

What percentage levels for sales manager commission overrides are appropriate?

2009-03-11T09:44:00.000-07:00

The consultant answer is "it depends" but unfortunately that really is true this time! For starters, I'd ask how much time the manager is spending managing vs. doing. You want to allocate his/her incentives accordingly. If 75% of his/her time is spending being a player, then 75% of pay should come from his/her individual performance (on the sales rep plan) and the other 25% should come from duties relating to managing the team (coaching).

Overrides can be problematic as a way to pay a sales manager, although they are very common because they are easy and economically straightforward (just take the % you can pay in total for a sale and split it up between reps and managers - your CFO will love the economic simplicity and direct alignment to profits). The problems arise because the manager ends up with a little "empire" of people that, if they are good, the manager will not want to have transfer to any other division even if that is best for the employee and the company. Also, managers can get "fat and happy" on an override plan without too much accountability. It is better to set a goal for the team's performance and hold the manager to attainment of that goal rather than give them a % of the total team's sales. Also, your managers likely have higher base salaries (less variable pay mix) than the reps, so you may not need to pay them as much (or as soon) from an incentive standpoint. It's not uncommon to pay managers quarterly when their reps are paid incentives monthly. However, this varies from industry to industry and some industries are "locked in" to paying managers monthly on a plan that looks and feels much like a sales rep plan but is based on overrides.

The other thing to consider is a "Coaching Effectiveness" bonus whereby the manager is paid for the % of reps on his/her team who achieve target performance in their key financial metric. This encourages the manager to work with all members of the team to manage everyone to a higher standard (or get rid of the ones quickly who can't get there). A plan based purely on an override formula can make a manager a lot of money based on the performance of one superstar on his/her team without pushing the manager to work with everyone on the team. I almost always recommend the inclusion of a 20% element for Coaching Effectiveness for my clients and universally they report that this is a great measure and fills in a missing link in the sales manager's incentive plan.

If you do want to calculate a comission rate for an override plan (in spite of my warnings above) then you do that much the same way you do for the sale rep plan. You need to approach it from 2 directions. First, how much can the company afford to pay as a % of revenue or profit and how should that be allocated among reps and managers and second, how much do you need to deliver in pay at target performance to attract and retain top sales managers. Often we start with the second question, which gives you the numerator ("our managers need to make $50K in incentive pay at target performance"), then ask productivity questions to determine the denominator ("and we expect a good manager to generate $10M"), and the result is a starting point for a commission rate (in this case 0.5% or 1/2 a percent). Then you check this against the answer to the first question and see if it lines up with what is feasible to pay and still generate the requisite profit for the company. If it doesn't, then you may need to adjust the assumptions you used to generate the numerator and the denominator. However, this is often the point in a design discussion where some compromise is needed (or a change in the staffing model - maybe for $50K the manager needs to manage 15 reps each generating $1M rather than just 10 - which which case his rate would now be 0.33%; or maybe the reps need to generate $2M each instead of $1M). Just be sure you model out the results, factoring in the reps' commission payments as well as the managers' to make sure your plan is affordable and will help you continue to attract and retain top talent.

Are sales organizations utilizing more attainment thresholds in their sales compensation plan designs as the result of the current recession?

2009-03-03T13:07:00.000-08:00

Among our clients I would say that companies are about as likely to lower thresholds as to raise them.

The logic for raising thresholds in this economy would be to protect profit. The logic for lowering them is that we are not nearly as confident in our quota setting accuracy in this economy - so while we "knew" that 70% of quota was unacceptable performance last year, this year we're not so sure where the unacceptable attainment will fall. (And, by the way, that is the point at which the threshold is often set - the level of performance below which the sales person is clearly not performing acceptably, and likely to be on formal notice.)

How do you go about incentivizing Solution Sales?

2009-02-18T10:15:00.000-08:00

We have worked with several clients where solution selling is (or is becoming) a priority. By “Solution Selling” you probably mean a sale that:

Incorporates several product or service offerings tailored to meet the specific needs of the prospect
Involves more than the individual sales lead including multiple specialists involved to match company capabilities to the needs of the prospect
May be one of relatively few large sales closing in a quarter or year (the sales person is managing a small number of large opportunities, not a large number of small opportunities)
Is a strategic buy for the prospect, with the opportunity to become more of a partner than a vendor over the long run
Requires an understanding of both your company’s offerings and the business problems they solve, including the basis for an ROI type justification for the prospect’s investment
Can be months or quarters in time to close (not weeks or months).

There are probably other characteristics that matter – but these are the hallmarks of the solution sale. The person executing this sale well is usually experienced, well-educated and highly compensated for an individual contributor sales person. They typically have a substantial base salary, with meaningful upside available when those large deals close. They also typically have significant influence over the profitability of the deal and/or the longer term relationship through a combination of pricing, product/deal configuration, and real value creation by matching capabilities with prospects’ needs. For this reason, they often are measured on deal profitability and/or account profitability. Typical plan design characteristics include:

Quarterly payouts (vs. monthly) in recognition of the longer sales cycles
Commission type plans (% of what is sold), as opposed to quota bonuses – because the deals are large and infrequent, so goal setting accuracy would be difficult
Capped at a deal level (not in aggregate) at a very high payout, perhaps 1 to 2 times the base
Profit/contribution measures (vs. bookings or revenue), perhaps in addition to bookings or revenue.

How often should sales people be paid?

2009-01-22T15:02:00.000-08:00

Generally speaking it's a good idea to align the payout frequency with the length of the sales cycle. If sales cycles are under a month, monthly payouts should be considered.

If sales cycles are 1 to 3 months, then consider a quarterly payout. For sales cycles of 3 to 12 months you should probably consider an annual plan paid quarterly based on year to date performance.

If sales cycles are longer than 12 months you can get into a trickier situation. If a typical sales person closes many deals per year, even though the sales cycle is long you might use a quarterly year-to-date payout as well. However, if the sales cycle is very long (> 12 months) and if there are few deals per year (less than 10 or so), you may need to consider other options. Here are two:

(1) A more base-rich pay mix with a "kill bonus" approach: The sales person has a base pay that is close to their market value, and receives a handsome "bonus" payout upon closing one of those large deals - either a small percent of the deal value (commission) or a fixed amount per deal (bonus), depending on how much influence they have over deal value. If they strongly influence deal size or deal value (margin), then a percent of the margin expected from the deal can be a good measure. If not, a fixed bonus may be a better approach. This is most appropriate for large deal “hunter” roles.

(2) A commission on revenue or margin payable as the revenue is recognized: This will be paid out over the first year, first two or three years, or the “life” of the deal. This will have the effect of creating an annuity stream for the future, will help to retain good talent, and may make it less appropriate to continue to pay that high base once a few deals are landed. This is appropriate for sales roles in which an ongoing account management (“farming”) emphasis is expected. If this is your situation you should consider the early-on high base as more of a non-recoverable draw against earnings which will disappear after the first 18 to 24 months in the job.

Should the cost of customizing our product be deducted from sales credit?

2009-01-08T06:27:00.000-08:00

Regarding the cost of customization, now you are talking about paying on the margin of the deal, not the revenue value. That's fine too - but would probably result in a higher commission rate. If you can accurately predict the margin value of the deal, it is an even better measure of the value created by the sales person. Many companies avoid this, however, because it results in hair-raising accounting at a contract level and lot of discussion and argument that can actually cut into your sales capacity. But if you can do this in a straight forward way, it is a great way to measure sales people.

What is the difference between revenue, bookings and sales credit?

2009-01-08T06:26:00.000-08:00

REVENUE is what you report for tax purposes based on the local applicable accounting rules.

BOOKINGS is also often reported to Wall Street quarterly for software companies and is a great leading indicator of their financial health. For our example above, this would be $500k reported in the month in which the deal was signed.

SALES CREDIT is whatever you use to measure your sales people. While it is most often tied closely to bookings, it is also common to credit the sales people only when revenue is recognized, or to provide credit based on the margin generated. You could also split credit among members of the selling team. This piece is totally up to you and is part of your comp plan design.

What's a good formula for a commission plan based on obtaining orders?

2009-01-05T09:30:00.000-08:00

So you want to implement a commission based acquisition system, based on obtaining orders/circulations of products/consumer goods in bulk.

Here are some suggestions about when a particular commission plan might be most beneficial:

A percentage of the first order/circulation

Use when:

The sales person influences the size of the first order, and a larger first order is both strongly desirable and indicative of the long-term value of the new customer relationship
There is a fulfillment/retention channel separate from the new customer sales channel that is responsible for ensuring re-ordering and growth of the account. This could be a call center or a self-service online capability, for example. In this case, the sales person's job is to get that first order, acquire new accounts - and another part of the organization takes it from there.

A percentage of each order/circulation

Use when:

The sales person is responsible for the first sale, the ongoing relationship, the growth of the account, or
A team of sales people are working to take in as much transactional (not relationship-based) business as possible, and different people may sell to a given account at different times - for example, a call center with calls routed based on language or simply availability.

A fixed sum for the first order/circulation

Use when:

The first order generally results is a satisfied customer and repeat business
The first order may be sold at a significant discount
The sales person has little influence over the size of the order
Any first order, regardless of size, takes about the same amount of work.

A fixed sum for each order/circulation

Use when:

The sales person has ongoing responsibility for processing orders/ transactions as quickly and efficiently as possible
All orders have about the same value (profit) to the company
The sales person has little influence over the size of an order.

By far, the most common sales incentive design is based on a percentage of each order. However, depending on the way you have designed your selling model, there may be good reason to measure and reward in one of the other three ways you mention.

How should sales be credited for SaaS sales?

2009-01-05T09:14:00.000-08:00

The principle to apply here is that the sales person should be paid at the point at which (1) you can reliably state the value to the company of the sale, and (2) you want the sales person to disengage and move on to the next sales opportunity. For most SaaS models with solid contracts selling to solvent companies, this is following the close of the initial contract (regardless of local revenue recognition laws).

In helping our clients design their sales compensation plans for this model we generally recommend that they credit 100% of first year revenue + a reduced percent of out-year revenue (perhaps 50%) so that the sales person receives 200% of annual revenue credit for a three year contract, for example. Then the sales person is paid their full incentive compensation for the deal soon after the deal closes.

Many companies pay in alignment with cash coming in, or with their local revenue recognition rules. However, over the long run this will have the effect of creating an annuity "tail" which continues to pay the sales person for success in prior years. While some companies believe this creates a retention incentive, it eventually has two serious negative effects: (1) the company ends up concurrently administering multiple compensation plans (one for the current year, one for the prior year to pay on all deals that closed in that year, another for two years ago to pay on those deals, etc.), and the administration becomes expensive and confusing, and (2) the sales person has relatively little risk in their compensation this year based on their performance this year as they are continuing to earn on deals closed in prior years, making them too comfortable with sub-par performance and giving the company leadership less latitude in directing sales effort towards the most important results.

What are the advantages of using a non-commission sales comp plan in mature companies?

2008-12-08T10:44:00.000-08:00

The top 3-4 reasons why management, within a mature company, may want a non commission plan are the following:

1. Mature companies with successful business strategies and an efficient go-to-market approach should, over time, see sales person pay go up with the labor market while sales productivity goes up faster. This means that comp % sales goes down. You have more control in continuing to align pay with the labor market and productivity with company expectations using a cost-of-labor plan (not a cost-of-sales = commission plan). If you have a commission plan, you are stuck communicating a lower commission rate every year (or at least every few years), which makes sales people nuts.

2. Market leaders with strong brands and value creating products have the right to claim the value they have created over time. This means they have the right to assign a sales person to a territory/book, expect them to maintain and grow it, but not expect to pay for the size of the territory/book in a linear fashion. So a person assigned a $6M territory should make more than a person assigned a $3M territory, but not twice as much. It is much more straightforward to manage the dampening of the comp delivered to keep that relationship non-linear in a quota-based cost-of-labor type plan.

3. True commission plans take a lot of tinkering and often involve a fair amount of discretionary adjustment, complicated mechanics and side deals. This becomes unwieldy in a significantly large sales organization. How fair can management be with such a system across 700+ people?

And if you'll allow me a fourth:

4. In a complex sales model with multiple people involved in the sales process by design, a commission plan does end up double-paying when you offer credit to multiple individuals. A quota bonus type plan will allow you to directly manage your cost of comp as you hold the right people accountable for their contribution to securing the business.

How do you know what the right commission rate is for your industry and area of the country?

2008-12-01T10:59:00.000-08:00

Answering this question is harder than it looks. The answer depends on the nature of the selling role, the level of maturity of the business, and the cost structure of the company.

At its most basic, a commission rate is derived by taking the total compensation you intend to deliver and dividing it by the amount of sales you expect. The result is the commission rate. Many companies then add motivation-enhancing mechanics such as acceleration at high levels of achievement so that commission rates may increase over the course of a quarter or year. But the starting place is those two key ingredients: the amount of variable pay you would like to deliver through the commission, and the amount you expect a person to sell in order to earn that much.

To determine the amount of money you want to deliver through the commission you must decide what the total compensation should be for on-target performance, and divide that appropriately between any base pay you will guarantee and the variable piece. In more mature companies it is more likely that there would be a substantial base pay level. Also, for very skilled selling roles, it may be necessary to offer a meaningful base pay in order to attract the talent you want into the role. And, in general, the more direct control the individual contributor salesperson has over the sales results on which they are measured, the more appropriate it is for them to have a high level of variable pay and a low level of fixed pay. Conversely, if the sales are made by a team, or if the brand is strong, or if a strong marketing function guarantees a steady flow of warm leads to which the salesperson must simply respond well, then a higher base, lower variable, and lower upside for over-performance arrangement would be appropriate. So that's a very high level overview of some of the issues around determining the total variable pay to be delivered through the commission, your numerator in determining the commission rate.

For the denominator, the total sales you're expecting from them, this is a function of how you are selling, the level of skill required, the characteristics of the market into which they sell, any support systems you have in place, the effectiveness of your competition, and your basic selling strategy. Knowing what your competitors expect of their sales people might be helpful, but do they have a teamed inside/outside pair, or only a Field sales person with no inside resource? Do you have a strong marketing department and a great lead flow while your competition expects their sales people to generate their own leads? Much goes into determining a productivity expectation for a salesperson, but this must be estimated, and will serve as the denominator for your commission calculation.

While it seems like a simple question, a lot of thought must go into getting to the right answer.

My employer thinks I made TOO much last year therefore he has a new pay package for me which caps my sales commission!

2008-09-23T06:29:00.000-07:00

My employer thinks I made TOO much last year therefore he has a new pay package for me which caps my sales commission! I am paid a percentage of the profits from my sales.....how can I make too much?

Unfortunately, we don’t have a quick easy answer to make all employers rational sales comp designers. We have to just help the clients who want help, one at a time. That said, here are two principles that may be relevant:

1. No caps. We rarely recommend a sales comp plan be capped – no need to take your top performers’ motivation out. But we do recommend deceleration at high levels of attainment, per-deal caps, caps on the % of margin on a deal that may be paid to the rep, etc. – these keep pay rational even in case of windfalls and large deals that were sold with “help” from company leadership.

2. Over time, sales people generally should earn more money each year – with pay going up as the labor market rates go up (about 3% per year on average these days). In a well-run company, sales productivity should go up much faster than the labor market rates for the sales people due to the investments the company makes in broadening the product line, building the brand, selling tools and systems, etc. As a result, compensation plans that are communicated as commission (% of revenue or margin sold) generally have to be adjusted so that the payout rates decrease. That’s the only way the math works.

So… you are right that caps aren’t a great idea. But your employer may also be right that there should not be a linear relationship between your compensation and your productivity over the long run.

Are there any design principles you recommend I use to differentiate between existing products to new customers and new business/new products?

2008-07-29T08:42:00.000-07:00

Generally a sales comp plan may pay differently for new products or new accounts in order to recognize a few typical characteristics of these sales:

1) They may take more time and effort on the part of the sales person, so should pay more as a percent of sales to make them worth that time investment

2) They may pull sales people out of a comfort zone, and so should be more attractive to help them focus on new behaviors

3) They may be more difficult from a goal/quota setting point of view, with little/no history to use as a basis, and so goals/productivity expectations may have serious accuracy challenges compared to the base business.

Here are the typical comp mechanics to recognize these challenges:

Characteristic of the sale: Takes more effort

Comp mechanics: Pay a slightly higher rate – 15% to 50% more than base business is about right, depending on the degree of difficulty

If the “more effort” is only a startup challenge, make it clear that in the future it will revert to a lower rate – so they have every incentive to get these sales going quickly (for new products); if it will always take more effort, the rate should probably not revert (new customers)

Characteristic of the sale: New / out of comfort zone

Comp mechanics: Pay a higher rate on the new stuff and a lower rate on the old stuff – to provide “carrots” and “sticks” – so ignoring the new stuff would mean less earnings than last year for the same results as last year; and meeting expectations on both old and new would result in slightly higher earnings

Again, make it clear that rates will not stay this high on the new stuff forever, so it will be in the sales person’s best interest to get a fast start

Characteristic of the sale: Difficult to set goals

Comp mechanics: Pay on the new stuff (products/customers) from first dollar, without a lot of dramatic acceleration or bonuses around quota/productivity expectation. If you know your goals are rough, don’t make attainment of them a high-stakes event for the company or the sales person. In fact, a straight commission (at an attractive rate) without any acceleration is a reasonable arrangement in the first year.

What type of itemization/documentation is an employer required to provide to sales people paid variable compensation?

2008-07-15T10:36:00.000-07:00

There is no requirement to provide documentation in this country (US). You are free to provide additional compensation whenever you’d like, based on whatever criteria you establish (or change). However, to maximize the motivational value of your plans, it is a good idea for both the employer and the employee to see the plans as a serious commitment by the company, and to have a written document showing exactly how it will work (measures, amounts, frequency, handling of disputes, eligibility, etc.). If you have such a document, that is in the form of a legally binding plan document, then you will also need to protect the company with language about management discretion, employee termination, when an amount is considered earned, etc. And you will probably want to run it by your legal counsel.

There are companies that successfully manage their sales forces without written plan documents. Typically their plans are very straightforward, and they don’t have very large sales forces. But the norm (and the best practice in most instances) is to have a good plan document that makes the “rules of the game” clear and serves as a helpful reference for all involved.

What are some of the key principles when putting product and program managers on incentive pay plans?

2008-06-11T06:44:00.000-07:00

Many companies are considering putting employees with non-sales roles on some kind of incentive plan. You mention putting your Product and Program Managers on variable pay plans and this is what I suggest:

1. Be clear on how much and for what measures the managers involved can "move the needle," with a direct effect on the company's financial results. Product Managers could be measured on product line gross margin or operating income, with a similar measure for Program Managers, for example. But make sure the measurement and reporting systems will support robust measurement of their results.

2. Be sure you have enough incentive to actually motivate and drive behavior towards the results you want. Anything less than about 15% of target cash compensation may not be worth the cost of designing, reporting and administering the plans (in terms of the effect on results). This can be tricky if you are offering incentives for the first time as you probably don't want to reduce base to fund them. If you can redeploy budgeted money from a broad-based employee incentive plan to help fund it, you can bring the pay mix in line over time through reducing the increases in base and putting them towards the variable portion.

3. Be careful with target setting. You need to aim for about 60% of your employees on variable pay plans to be at or above target, or it won't motivate much.

4. Offer enough upside. If you are putting people in an at-risk pay situation, possibly for the first time, you need to be sure a few people really ring the bell and get a handsome payout (1.5-2.0 times the target incentive), and publicize and celebrate these successes -- it helps motivate everyone.

5. Be sure the people in the role have the risk profile to find thismotivating (or that that is the sort of person you want in the role, and are willing to make the needed adjustments). Not all solid employees are "coin operated."

What is your advice re: "sales compensation" for non-profits (e.g., underwriters in non-commercial radio)?

2008-06-11T06:34:00.000-07:00

In the non-commercial radio world, there is a role that is referred to as underwriting staff. They go out and solicit contributions from businesses for a mention on the air. It is basically sales in the non-profit broadcasting business. One station's staff has always been salaried and now they are thinking of going to a commission structure.

My suggestions:

My advice is to offer some variable pay, but move slowly. My guess is that you want a collaborative non-profit approach by your “underwriting staff,” not an aggressive sales-y approach. Their degree of aggressiveness and their level of effort may go up as you offer them incentives; but your ability to control them and their tendency to work collaboratively with their team and the rest of the company may go down. You also need to assume that you have people already in the role who chose it because they liked the reliable low-risk pay environment. Too much at-risk, and you could scare them away – which is OK if that’s what you want to do, and if you have the ability to re-fill those positions quickly.

So, that said, I would suggest that you move to a fixed dollar payout opportunity at target – same value for all of them – we’ll call that their bonus. Then set a goal in “underwriting” that they have to achieve to get it. Start paying some variable pay around 70% of goal (since it’s the first time you’ve set these goals), and offer 150% of the target at around 130% of goal. The payout should probably not be funded by reducing base salaries in the first year you do this, as that could also be scary. If you are already paying below market, you may have room to offer a bonus by paying a little more in total and putting the entire annual increase into the bonus. Even $5,000 in the first year will start to get things going and capture their attention. $10,000 would be better. And over the long run you are probably headed towards a pay mix that is about 60% to 70% base and 40% to 30% at-risk.

What do you consider to be the key principles are important in considering role-based incentive plans?

2008-06-10T06:54:00.000-07:00

Role-based incentive plans are used to motivate and reward those who have a direct effect on company financial results, in both sales and non-sales roles. Keep these key principles in mind when designing a role-based plan:

1. Pick measures that are linked directly to income generation for the company (e.g., revenue, units sold, margin) rather than activity level (e.g., number of calls).

2. Pick as few measures as possible to cover the primary accountabilities of the role. One or two would be a good number for a newly-instituted plan. Three might be OK. More than three would have to be well-justified as it dilutes both the message communicated by the incentive plan and the payout value of accomplishing any of them.

3. Design the plans with line leadership's involvement so that they introduce them with a message like, "Here are our new incentive plans. We are thrilled to share them with you because we believe they will significantly increase both your income and that of the company. Let me show you how . . ."

4. Provide great materials to communicate the plans -- since the reason you're doing it is to motivate and excite the eligible employees.

5. As soon as you have an idea of what the final design may be, start planning for accurate and timely administration of the plans and great reporting. You risk losing much of the motivational value if employees don't see a frequent and easily understood connection between their results and their earnings.

How can I reward project managers who bring projects in on time and within budget?

2008-06-10T06:50:00.000-07:00

This high-end residential remodeler wants to reward project managers who bring projects in on time and within budget. Given that they have a great deal of control over on-time, on-budget project completion, it was a great idea to provide them with incentives to make that happen.

I suggest the following:

1. In order for incentives to really drive behavior, they need to include both an element of risk (they would earn less than their full market value if they didn't earn the incentive) and potential for upside (they have an opportunity to earn more than their full market value if they beat their goals).

2. In addition, the incentive opportunity at target (for at-goal performance) should comprise at least 15%, and probably more like 20-25% of their total compensation. Moving to this sort of pay mix isn't something to be done all at once -- gradually over time is probably best -- a value closer to 10% of base as an incentive opportunity in the first year would be a good place to start. Then in future years, base increases could be withheld to fund a more meaningful incentive opportunity.

3. Identify the measures and mechanics of the plan. If the incentive at target is $10k per year, and if a typical Production Lead is responsible for 5 projects per year, then the "plan" could be a simple as $2000 for each project completed on-time and on-budget, payable following customer sign-off. Consider adding some upside in the form of additional payments for savings vs. budget (e.g., $1000 for each $10,000 in savings) -- but be careful about what behaviors are rewarded when choosing this path -- you don't want to jeopardize quality. Also consider paying a portion of the target incentive for almost-there performance (from our example above, you could reduce the payout by $500 for every day late, for example).

The possibilities are endless, but the principles are few.

Can the role-based principles that apply to sales compensation design also apply to variable pay plans for non-sales roles?

2008-06-06T06:14:00.000-07:00

Do you have any tips on developing a business lead incentive program for a non-sales employee?

2008-06-06T06:10:00.000-07:00

Companies typically use a referral fee as the vehicle to pay a non-sales employee who identifies an opportunity, refers it to a sales person, and it closes and becomes new business for the company. Lead referral incentives can be great to motivate the rest of the company to feed good leads to sales, similar to bonuses offered to employees who identify an external candidate for an open position. Here are a few guidelines to maximize the effectiveness of your program:

1. Offer a meaningful reward, but not one that will encourage non-sales people to focus so much on this earnings opportunity that they neglect their key accountabilities. For example, if the eligible employee has total compensation without the lead bonus of $50k/year, then an award of $100 - $200 for a lead that turns into business would be about right (assuming their opportunity to hand off these leads would come up only a few times per year, and the deal value is such that the referral fee is affordable).

2. Start the program for a limited time – six months or a quarter for example. This gives people a sense of urgency to find some leads, and also gives you a chance to adjust if it isn’t having the results you want. You can always declare success and extend it.

3. Only pay the award for results that hit your income statement. If you pay for leads, you may get a lot of leads. If you pay for closed deals resulting from leads, your lead quality will be better.

4. Watch for any pattern that would indicate that suddenly all leads have come from an eligible referral source. Some companies have had the experience that, when such an incentive is offered, it appears that there is an attitude that someone may as well get the referral bonus so let’s be sure to code someone to get it every time.

5. A few months into your program, check with your sales people about the quality of the leads they are getting. Be sure you are clear with your referrers about what constitutes a good quality (well-qualified) lead. It will make everyone’s efforts more productive and the whole program more satisfying.

Do you have any experience/insight into draw against bonus in the software industry?

2008-06-05T06:18:00.000-07:00

If you referring to a bonus plan that is paid at year-end and is available broadly across the company to people in leadership and technical roles, then you should know that many technology companies do pay more frequently than once/year. Many pay quarterly. The question of whether the payment is a “draw” or a payment for year-to-date results may be one of semantics.

Some technology companies pay quarterly for results that quarter. In this case, each quarter stands alone and there is no concept of a draw.

Some pay quarterly as long as year-to-date results meet certain criteria – this version could be considered a draw in the sense that the plan design is an annual plan with a quarterly payout mechanism. Usually any accelerated over-target payout is reserved for year-end when the total year results are available and overall over-performance can be verified.

I have assumed here that you are not asking about sales compensation plans, where draws are more common. These are generally offered in roles where sales people have a smaller portion of their total target compensation in a fixed base (less than 60% or so), and a highly seasonal business. For these roles, the draw is needed to keep cash flow stable during the “off season.”

When should commission rates decrease, and why?

2008-06-05T06:15:00.000-07:00

We generally recommend that rates decrease at a very high level of performance, well above goal. And the decrease should continue to hold the rate above the "base rate" (immediately below goal rate).

I agree that this is not always appropriate, but should be considered when:

1. The plans are goal-based and goal setting is "loose" so that some people achieve, for example, 200% of the goal. In this case, the high level of achievement could be due to a bad goal.

2. The sales people sell very large deals, which could tend to make performance "lumpy." Often times these deals are closed with help from senior leadership in the company, and often also at a lower marginal profit. While it may be harder to close a $4M deal than a $2M, it's probably not twice as hard (and it may not be worth twice as much to the company).

3. The company has a history of capped plans. Deceleration is always much preferable to caps.

The other philosophical principle here is that you want to put as much money as you can right above goal so that the reward for getting to and beyond goal is the opportunity to live on a wonderfully accelerated slope. In fact, it's great to put so much money there that the company would not choose to afford it indefinitely. So when you do decelerate, the rate is still quite attractive. This will serve to pull your OK performers up and over goal without causing unaffordable windfalls in comp.

What are the advantages and disadvantages for paying for activities vs. paying for results?

2008-06-04T06:11:00.000-07:00

Some sales comp plans pay for activities instead of, or in addition to, paying for results. What does your comp plan pay for?

In designing a sales comp plan, we strongly recommend paying for results, financially measurable results (as opposed to activities). Sales compensation, to be really motivating, generally involves significant cash and upside -- and you want to be sure that those payouts are rewarding sales people for results that more than cover the money to be paid.

With that said, other great measures besides just sales/bookings/revenue are often used, generally they have to do with the quality of the sales dollar. Some sales dollars may be more valuable to your company than others -- like sales of more profitable products or services, or sales of strategically important new products, or sales into an important targeted industry segment.

Also, sales over goal are generally more lucrative for the sales person than those below goal. And consistent sales performance is often valued over sporadic sales performance. These are just a few of many alternatives to just paying on sales. Picking the right one is all about aligning the rewards with what is most important to the success of the business.

How do you design sales comp plans for sales roles that have to do two different things well?

2008-06-04T06:06:00.000-07:00

When sales people have competing objectives.....imagine the following scenario:

A company has two different products for banks: core processing systems and lending products. For the two products, there is a large difference in the incentive opportunities. For example, the incentive opportunity on $1.5M processing system sale is $75,000 (5% commission). The incentive on a lending product sale may be only $5000.

Question:

How do you motivate the right focus and results, limit “elephant hunting," and keep both product lines productive?

Several possible approaches:

1. If there are skilled "elephant hunters" on staff, a role could be carved out for them that tolerates, even rewards that behavior. You would probably then also need a designated lending-only role. So... split the roles and play to strengths.

2. If you want to have one person cover both, and if it is indeed essential that they do both, then you need an "And-type Comp Plan" -- a plan where they have to do both to really make the sweet money. And that means linked components.

Linkages can be as severe as

(a) No over-goal payout until $xx in lending products are sold, or

(b) Reduced commission rates on both until both reach some threshold.

Linkages can also be as gentle as

(a) Hold back 10% of core commission until a threshold level of lending product is sold (something like 75% of goal), or

(b) Add 10% additional to core commission once lending products are at or above goal, or

(c) both (a) and (b).

Our sales managers would like the flexibility to design a comp plan that rewards for different results in different quarters, but based on numbers.

2008-06-03T06:22:00.001-07:00

This type of component puts in place the ability to very directly manage pay, including potentially managing upside, in the hands of sales management. The availability of this sort of management discretion to directly design incentive components and determine payout amounts generally results in widespread direct management of pay levels and a decoupling of payout amounts from market value and productivity.

We generally recommend MBO-type components only for sales roles in startup mode or with very long sales cycles (over a year) for which solid performance this year will not show up on this year's income statement. When we do design an MBO based incentive opportunity, we limit the flexibility and payouts to a few specific amounts (e.g., pay 0% at Unacceptable, 50% at Below Goal, 100% at Goal, 125% at Exceeds Goal, and 150% at Excellence). While it is mathematically possible to interpolate and pay a little bit more money for a little bit more performance, this suggests a degree of rigor and accuracy in goal setting and incentive design that is not likely to occur with multiple components changing each quarter and focused on one person. The more constrained type of MBO that we generally recommend, in contrast, says, "Generally do what we expect of you in this area and receive your target payout, do significantly better and get a nice piece of upside, underperform and it will hurt your pay." This is usually the right message and mechanic for MBOs.

When is it appropriate to measure results generated by a team rather than just results generated by an individual?

2008-06-03T06:18:00.000-07:00

Often we are asked about how to provide incentive compensation for team results. The key principle here has to do with how the sales are made. Do the team members depend on each other to be successful? If they do, for each sale, then a team incentive where they have a single team target and a single team actual result, all receiving the same payout, makes great sense.

If each team member has his or her "own" sales, and also supports the effort of the team, then an individual sales goal and a team goal may both be indicated (usually with a higher weight on the individual goal).

And if team members are only linked by the fact that they all report to the same boss, then a teamed incentive component may be no more than a "shared lottery ticket," and you would probably do well to apply those incentive dollars to something more directly linked to the skill, effort and productivity of the individuals.

Incentive plans for inside sales can be complex, depending on the situation, what should I be on the lookout for?

2008-06-02T08:25:00.000-07:00

Before diving into a plan design for inside sales, you must first answer several questions:

What type of inside sales are they doing?

Do they qualify for the 7i exemption or are they non exempt employee?

These questions must be answered because, if they are non-exempt, any incentive earned must be included in their hourly rate. If they are exempt, it would make it much easier to implement an incentive with less administrative costs. Assuming you conclude they are either exempt, or that the administrative burden if they aren't is "worth it," then here are a few tips for designing their incentive plans:

1. Incentives are a great way to support an initiative to change behavior, but the rest of the initiative needs to be in place as well. This may include training, systems enhancements, coaching and mentoring, etc.

2. If you really want to use incentives to motivate and excite, then you need "carrots and sticks" to be part of them. Over time you will want to migrate base salaries down as a percent of target total compensation so that the target incentive must be earned in order for the employees to maintain market-competitive pay.

3. The amount of pay at risk depends a great deal on the nature of their inside sales roles. Although it can be more complex than this, one simple division is between jobs that are primarily "inbound" and those that involve more aggressive "outbound" calling. If an inside seller mostly reacts to requests from customers and is primarily doing an order management function (perhaps with some ability to cross-sell or up-sell), then a relatively smaller percent of pay at risk (in the incentive) is appropriate. For outbound inside sales people who more strongly influence a prospect's decision to buy through their own creativity and initiative, more pay at risk (and more associated upside) would be a good idea.

Can you please share some of your "best sales compensation practices" for your typical Account Manager role?

2008-06-02T08:15:00.000-07:00

Account Managers usually have responsibility for managing the relationship and growing the business with assigned existing accounts.

There are many possible compensation arrangements for Account Managers -- but here are some tips that may help guide the design process:

1. Account Manager roles are generally rewarded for growing their assigned accounts -- ideally growing account profitability if it can be measured.

2. Compared to the "hunter" job (what I think you're calling the Sales Department), they would generally have less pay at-risk (as a percent of total comp).

3. The Account Manager would be more likely to have a bonus type mechanic than a commission. (A bonus is an incentive that delivers a pre-established payout amount for hitting a pre-established goal, and less for under-performing, more for over-performing. A commission is communicated as a percent of productivity, like 3% of sales.)

And, as always, the measures and acceleration points in the comp plan should focus the Account Managers squarely on delivering the results most needed by the company -- which varies from one company to the next.

An account may become past due after commissions are paid. What are the options?

2008-05-30T07:24:00.000-07:00

Sometimes customers return products, or they just don't pay. As a result, some companies do a charge back on commissions paid to the sales person on the sale. The legality of this practice can vary from state to state. However, it is common practice to recover commissions paid in cases in which the company is not paid.

To be sure you're covered legally, and that everyone knows what to expect, you would do well to document your intention to charge back commissions in case of returns or non-payment in your compensation plan document. Your plan document should also cover how you intend to handle leaves of absence, terminations, and claim the right for management to change the compensation plan at their sole discretion. Once you have that document in place, have a local lawyer review it, and you'll be all set.

What are some of the "best practices" in terms of incenting sales people in an manufacturing environment?

2008-05-30T07:20:00.000-07:00

Often in manufacturing companies, sales people influence both the volume of sales and their relative profitability, rewarding simultaneously for both puts the incentives in line with what's best for the company.

Three nice ways to approach this that are pretty straightforward are to either:

1. Make revenue the primary measure using a bonus-type mechanic, and add a profitability multiplier. For example, they could add 20% to total earnings (1.2 multiplier) at year-end if a stretch profitability goal is achieved, lose as much as 20% of total earnings (0.8 multiplier) if they are below an unacceptable level of profitability, or have no effect on their own earnings in-between (1.0 multiplier). This would be most appropriate if revenue is the most important focus for sales, with profitability in the also-important category. It would also be appropriate if profitability is difficult to measure at the individual level, but very accurate by business unit or in aggregate.

2. Measure sales people only on gross margin or gross profit dollars, and drop revenue. This would be appropriate if you can accurately measure profitability by individual sales person. Here again, a bonus-type mechanic is probably the best choice.

3. Use a matrix with revenue goal attainment on one axis and profitability goal attainment on the other. In the middle of the matrix (at goal on both), pay 100% of the target incentive. As both revenue and profitability increase, pay over-target earnings. Pay very little for below-goal performance on both. And pay in-between if they’re over on one measure and under-goal on the other. It’s a little tricky to design the matrix, but once you’ve got it, it’s very easy to understand and administer.

What is considered "best practice" with regard to payout eligibility and employment status re: incentives and contests/SPIFFs

2008-05-29T14:41:00.000-07:00

My answer is different for contests and SPIFFs than for core incentive components. Let’s start with the core incentive component (part of the official compensation package, documented in a signed plan document or employment agreement, representing a portion of the official compensation package, with on-target payout needed to provide market-competitive total compensation). For core components, give some thought to what you’re trying to accomplish with your eligibility requirements. Some companies feel that requiring people to be currently employed at the time the payment is made improves retention and is more fair to the company. Consider the possibility, however, that you will have people who have already decided to leave staying in the role, collecting their base, cementing personal relationships with important customers or prospects, and delaying your hiring of a more committed resource while they are waiting for their incentive payout.

In addition, it is true that payment in this category must be paid regardless of employment status at the time of payment in certain states and industries. The criteria here have to do with the nature of the job (selling, not delivering services or managing sales people), relationship with the company (employee, not a contractor or outside rep), and the mechanics of the comp plan (communicated as a percent of sales, not a bonus). My counsel on the core components is generally to pay them regardless of whether the employee is currently employed at the time of the payment.

There can be some protection here by noting that payments (made following order intake, for example) are an advance against earnings, and that the commission is not earned until the cash is collected. So if the cash is not collected until after the employee has left, the commission has not technically been earned.

Regarding contests and SPIFFs, you are probably safer in not paying unless employed, legally (but check with real lawyers). And you are also probably not risking any unproductive lingering by disengaged employees if you do require people to be present to be paid – mostly because contests and SPIFFs are generally shorter in duration between announcement and payout, and the stakes aren’t as high. It is a very common (and in my view reasonable) practice to only pay for these incentives if the employee is still employed when the payment is made. A good practice in these cases is to make that intention clear in the contest/SPIFF documentation – fine print at the bottom of the flyer/email works fine.

As always, while we can provide some general guidance on this topic, we strongly encourage you to seek additional legal counsel and review of your official sales compensation plan document to ensure it is compliant with federal and state legislation, specific to your company and the location of your sales representatives.

What is an override/overwrite?

2008-05-29T14:39:00.001-07:00

An "override" (also sometimes called an overwrite) is a commission paid on the sales someone else makes. For example, you may have a sales person with a 5% commission (earns 5% of the sales value of whatever they sell). This person may have a sale manager with 6 direct reports, and may receive as his/her compensation 1% of the sales of all the people reporting to him/her. The 1% to the manager is an override. It is a common sales compensation mechanic in small or early stage businesses.

Over time, most businesses benefit from moving their sales leaders to a goal-based plan with payout thresholds (e.g., no variable pay earned under 75% of the year-to-date goal), and acceleration for over-goal performance.

How do we design a 100% commission plan, and how does that interact with a draw?

2008-05-28T13:01:00.000-07:00

There are many different ways a 100% variable commission plan can be structured, depending on the needs of the business and the nature of the product sold. The most simple approach for pure new business developers is to use a flat commission rate based on expected revenue and the amount you need to pay the person, and then pay that rate on all new revenue for a specified period of time (e.g., 12 months). Often, but not always, the rate continues for an additional period of time at a reduced level. If the person is expected to retain control of the customer, or has a mix of new business and account management responsibilities, then plan design is considerably more complex. If there is a defined "hand off" point when the customer goes to an account manager, then you may need to consider doing a "hand off bonus" to compensate for the perceived loss of income from the new business developer. The problem if you don't do this, is quickly your new business developers become account managers (it's easier to farm than to hunt!). First rule in sales comp design is define the roles and accountabilities. From there, plan design is relatively easy.

The other thing to consider is the economics of the draw. Is there a valid business reason for delivering pay this way vs using a modest salary? Typically there is "recurring revenue" that is generating a relatively fixed amount of compensation that is actually acting as a base salary. I've found over 10 years of designing sales comp plans that 9/10 times using a 100% variable approach with a draw actually REDUCES the effectiveness of a sales incentive plan and makes it hard to attract talent vs using a modest salary + truly variable incentive. However, in some industries, this approach is the norm.

Are our commission rates too high?

2007-05-18T11:08:00.000-07:00

I was asked recently about a sales force that has been on a simple commission plan now for years -- 50/50 split of deal profit between the sales person and the company. However, in recent years they have been hiring less technically skilled sales people, and it no longer seems worth it to the company to share so much of the profit with them. The company is hiring more sales management, providing technical training, and technical support people to ensure the product is sold well.

Typically as a company grows, the company adds value (brand, product breadth, back office systems, marketing, etc.) and the sales person should therefore be able to sell more with the same level of skill and effort. This means that, while sales compensation should continue to increase year over year (with the labor market), sales productivity should increase even faster -- which means that over the long run, commission rates generally come down. And at some point in this process the comp plan may switch from a commission mechanic (% of sales/margin) to a bonus mechanic (earn the target payout for meeting quota, more for more, less for less).

This company has experienced both the maturing of the company, and they have added a decrease in the capabilities of the sales people to the usual combination. So the answer is that, yes, the commission rates need to come down. However, just adjusting rates down and leaving all else alone is probably not the best answer. They should probably have a look at their basic pay structure, sales roles, labor market, key strategic imperatives -- and make some structural changes in the plans all at once. Ideally they also support this with training, great coaching and mentoring, exciting new product introductions and lots of reassurance and encouragement. The goal is probably not to reduce total comp delivered per sales person, but to improve the ratio of sales comp to sales productivity. So while earnings continue to increase for sales people, sales productivity goes up even faster.

Sales Director Plan Designs - not the same as those for individual sellers

2006-09-04T09:42:00.000-07:00

Sales Director comp plans should bear a strong relationship to the plans of the individual sales people, but should also have a few key differences:

Be sure the Director of Sales "wins" when his/her people win. So starting with their compensation plan and aggregating is a good approach for at least one measure.
Even if the individual contributors have a commission-type mechanic (payout is a percent of what is sold), consider a bonus-type mechanic for the Director job (payout is a target amount for hitting goal, less for less and more for over-goal achievement).
If your reporting systems support it, you might consider a measure of "contribution margin" for the Director. That would be [sales] - [cost of sales] - [directly controllable sales operating costs]. That measure rewards the Director for making the right tradeoffs in sales resources to get the maximum contribution from the overall sales force.
Another great idea for sales managers is a bonus based on the number of direct reports who meet or exceed their sales goals for the year. This type measure doesn't allow riding on the coattails of the over-performers, and encourages good coaching, hiring, and “pruning” of the organization over time.
The pay mix for the Director of Sales is generally less incentive-rich than that for the individual contributors. So if your individual sales people have 60% of their target total compensation in their base (at midpoint) and 40% in their incentive (at target), that’s a 60/40 mix. In that sort of situation, a Director of Sales might have a 70/30, or even a 75/25 mix.

Rewarding sales people for both revenue and profitability

2006-09-04T09:10:00.000-07:00

When sales people directly influence both sales volume and profitability of what they sell, rewarding them for doing both well aligns their incentives with value creation for the company. Here are three approaches to consider:

Make revenue the primary measure using a bonus-type mechanic, and add a profitability multiplier. For example, they could add 20% to total earnings (1.2 multiplier) at year-end if a stretch profitability goal is achieved, lose as much as 20% of total earnings (0.8 multiplier) if they are below an unacceptable level of profitability, or have no effect on their own earnings in-between (1.0 multiplier). This would be most appropriate if revenue is the most important focus for sales, with profitability in the also-important category. It would also be appropriate if profitability is difficult to measure at the individual level, but very accurate by business unit or in aggregate.
Measure sales people only on gross margin or gross profit dollars, and drop revenue. This would be appropriate if you can accurately measure profitability by individual sales person. Here again, a bonus-type mechanic is probably the best choice.
Use a matrix with revenue goal attainment on one axis and profitability goal attainment on the other. In the middle of the matrix (at goal on both), pay 100% of the target incentive. As both revenue and profitability increase, pay over-target earnings. Pay very little for below-goal performance on both. And pay in-between if they’re over on one measure and under-goal on the other. It’s a little tricky to design the matrix, but once you’ve got it, it’s very easy to understand and administer.

A new commission plan for Customer Service Reps

2006-08-25T13:26:00.000-07:00

Typically, commission programs are used for revenue generating roles. If your Customer Service Representatives are in a position to influence the customers to buy more, to retain them, to cross-sell them, or otherwise to generate revenue, then this can be a great approach. If they are more fulfillment, helpdesk or troubleshooting oriented, a bonus program might be more appropriate.

If you are just starting out with a commission program for people already on an all-base plan, then funding the commissions will be an issue. For variable pay to really motivate behavior, a number of conditions have to be met:

The eligible employees need to have the ability to make the results happen themselves, or as part of a very small team (2-6 people).
You need to be able to establish a productivity standard -- know how much you expect the employee to "produce" (/sell/retain/collect).
There needs to be true at-risk pay so that the eligible employee will not earn their full market value unless they meet the productivity expectation and earn the full target incentive.
There needs to be upside for over-performance. This is the counter-balance to the risk you are expecting them to assume in #3 above. Without the possibility of better-than-expected rewards, the risk isn’t worth it. This means that your top performers (top 10% or so) should earn a small multiple of what is earned by on-target performers (1.5 – 3 times as much, for example).
You need to have, or be willing to hire, people in the role with an appetite for the rewards and risks of such a compensation arrangement – willing to bet on their own ability to make a difference, and excited about the prospects.

Of course you can move to such an arrangement gradually over time, holding base constant, adding a few percentage points of base to the incentive at target each year (5% or so), improving your goal setting abilities, and learning to manage under a commission program.

Hiring your first sales person

2006-08-21T10:05:00.000-07:00

For most small companies, your first sales hire is hard to do well. You don't have a sales leader to help you confirm you have the right skills and temperament for the job. You're not sure what to expect in terms of productivity. And you don't have a pay structure or comp plan to tell you how much this person should earn, what kinds of special arrangements are needed (car, expense account), etc.

We'll leave a lot of that to your other advisors and focus here on the compensation piece. Here are the basic steps you need to complete to arrive at the right comp plan for your new hire:

Your first step is to determine a reasonable level of total compensation for a sales person in your business -- that's what their W-2 says at the end of the year. This is undoubtedly tied, in the thoughts of company management at least, to how much the person should be able to sell in that first year -- the cost needs to be associated with a reasonable return. You'll get better at that as time goes by, but you'll have to start with some kind of working assumption based on others in your industry, leadership's experience in selling your products or services, even to a certain degree the perspective of your top candidates for the role and/or a recruiter who may be helping you to fill it.
Next you need to decide how the risk will be shared -- how much of that target total compensation will be in a fixed base salary and how much in the incentive at target. For early stage companies, the fixed portion may be relatively low, even 30% to 50% of the target total compensation. However, if you are trying to attract a well-established resource to bring their network, skills and experience to your company, you may have to offer a higher base since their choices include many with less risk.
Now you know how much the incentive at target will be, so your next step is to be very clear about WHAT you expect your new sales person to PRODUCE per year. This is usually measured in revenue dollars, but may be measured in units sold or even gross margin dollars in some industries. Whatever the measure(s), you need to design a plan that delivers the target incentive amount for getting to the productivity goal. This is most typically communicated as a commission (to calculate the rate, divide the target incentive by the productivity expectation). There's more to consider in designing the payout table than this article can address, such as threshold levels of performance (below which no incentive is earne), acceleration and deceleration in payout rates at over-goal levels of achievement, etc. You will also need to be clear about payout timing (monthly, quarterly, etc.), and measurement periods (independent or year-to-date).
Your last design step is to check the plan's appropriateness across a broad range of possible levels of productivity, and be sure you're comfortable with both the cost to the company as it relates to results and the income level for the sales person. You will very likely make some kind of adjustment after this review, which should probably involve someone from your Finance group or the company's owner.
Once you feel you have the right design, your next step is to carefully document the plan in a Plan Document to be signed by both the sales person's manager and the sales person. Here, you should probably ask for a review by your legal counsel.
And finally, determine how you will administer the plan - where the data will reside, what reports will be run, who will do the initial calculation, who will review and approve it, and how the information will be communicated to your payroll processors.

Then after you've been living with the plan for a few months or quarters, have a look again to see if it's meeting your needs. Always include a clause in the plan document claiming the right to adjust as needed, then don't adjust during the plan year unless you've got a BIG problem. But do consider adjustments each new plan year. As your business grows and changes, the perfect sales comp plan will also change.

Sales Manager bonus plans

2006-08-21T09:31:00.000-07:00

The bonus program that is the best one for your business depends on what your reasons are for offering the bonus. If you are looking for a way to provide additional income for your sales managers in years when it is affordable, and to keep them at least interested in the overall company performance, then a year-end bonus tied to overall company results may be the right answer for you.
However, if you want to motivate and reward for results they themselves are capable of generating, giving them meaningful at-risk pay to "penalize" those who don't deliver and exciting upside to reward those who really ring the bell, then you might want to consider tying their variable pay more directly to results they can personally control. A more typical sales management variable pay plan would tie a fixed value incentive opportunity to achieving a sales or gross margin goal, with ...

...no payout for performance before some threshold value (50% - 90% of goal depending on goal setting accuracy and company/market maturity),

...increasing (but linear) payout between the threshold and the goal,

...accelerated payout (more $/percentage point of goal achieved) for over-goal performance, and

...deceleration or a cap at a very high level of performance (110% - 150% of goal, again depending on goal setting accuracy and company/market maturity).

Account Managers vs. Business Developers: Key comp plan differences

2006-06-20T10:28:00.000-07:00

Have you decided it's time to specialize in your sales team? One of the first ways companies do this is by separating the Account Management role from the Business Develoment role. If you're thinking of this approach, and if you have a reasonably short sales cycle so that your business developers close at least several new customers per month on average, these tips are for you.

Pay mix and upside: Selling to new clients generally relies more on the initiative, skill and creativity of the sales person than does managing existing clients. Existing clients continue to buy partly because sales people do their jobs well, and also very much because the company has delivered value to them in the past. What this means for comp plan design is that the business developer generally has more at-risk pay as a percent of Target Total Compensation than the account manager. The business developer also generally has more upside (more acceleration above target performance) than the account manager.
Measures: For account managers, measures typically include both revenue and some measure of account (/territory) profit contribution – maybe gross margin or gross profit. For business developers, it is less common to emphasize a measure of profitability as long as it is within acceptable bounds. The message is that the business developer gets the new customers in, then the account manager works over time to grow the value of the relationship to both your company and the customer.
Incentive form: Depending on the industry you’re in, the market position of the company, and your compensation philosophy, you may be using a commission type incentive (percent of sales, percent of margin, etc.) or a bonus-type incentive (fixed dollar payout for achieving the assigned goal, less for less, more for more). Bonus type incentives are more common in account management roles, and commission type incentives are more common in business development roles.
Payout frequency: Because the business developer has less fixed pay and is more personally and immediately accountable for results, they are often paid more frequently than the account manager. The business developer may be paid monthly, for example, while the account manager is paid quarterly.

Appropriate cost of the sales force

2006-06-15T07:33:00.000-07:00

Question: Our sales force's compensation is 38% of total company compensation. Is that appropriate?

Answer: There's not really any useful benchmark I know for sales compensation % total compensation. It depends very much on your industry, company stage and basic competitive strategy (technology driven, operations driven, market driven).

The right place to focus is on the value of the sales force and how that relates to the cost. Even if what they are paid is market-competitive, it could be that you don't have a sustainable selling model if the rest of the economics of the company (marginal profitability of the next sale, cost of supporting the sale, overhead structure, other channel costs, etc.) don't align to create value for the owners.

There are useful ratios that hold within industries like total sales compensation should stay below xx% of revenue -- but even these are useful guidelines at best.

One key idea to keep in mind is that, as a company matures, the sales people should continue to earn more money each year. But their productivity should go up even faster than their earnings so that sales compensation as a percent of revenue declines gradually over the very long run. This is because the company is adding to the sales person's ability to be productive every year by building their product line, cost efficiency, market presence, selling tools, etc.

First year comp plan for a new experienced sales person

2006-06-15T07:31:00.000-07:00

Question: We need a comp plan for the first year for a new experienced sales person.

Answer: My suggestion is that you first be clear about the long-term nature of the role, the expected level of productivity (e.g., sales/year), and the amount of total compensation you feel would be appropriate for that level of productivity. You can then design the "steady state" comp plan for the longer run.

Once you have designed the long-term comp plan, you will be able to clearly state the base pay amount as the base for that long-term plan. Let's assume it's $60k base with a target total compensation of $100k. Then you would offer a non-recoverable first year draw of $40k with the expectation that the second year, any pay in addition to the base would have to be earned based on the mechanics of the incentive plan.

Where are the sales comp plan templates?

2006-06-15T07:30:00.000-07:00

A couple of good sales comp books

2006-06-15T07:26:00.000-07:00

HR/Compensation professionals are often asked to learn about sales comp as part of their job. One good place to start is with a book, and I recommend both "The Sales Compensation Handbook" edited by Stockton Colt and "Compensating New Sales Roles" by Colletti and Fiss. In addition, there is a very helpful course offered by World at Work, "Elements of Sales Compensation."

Sales compensation design is exciting and challenging, but it is high-stakes work. There are terrific ways to really create value for your company, as well as wrong answers that can create a disaster. If your company's challenges are significant, a consultant can help.

Basic principles guide sales comp design

2006-06-15T07:22:00.000-07:00

In comp design, the possibilities are endless, but the principles are few:

Ensure that the incentive offered is meaningful enough to drive desired results (but no so "meaningful" that problems arise with quality, integrity, etc.).
Make the goals/ criteria for earning the incentive clear and explicit -- and achievable. If goals aren't seen as achievable, no one is going to reach for them.
Align measures with top priorities for the company -- remember that your incentive plan is a powerful communication medium. If you pay for activities, you will get activities. If you pay for results, you will get results.
Document and communicate the plans well. Track and report more frequently than you pay. Publish the reports in an understandable format.
Keep it as simple as it can be and still reflect the requirements of the business. In the tradeoff between Simple and Fair (meaning perfect reflection of value created by the employee), err on the side of Simple.
Keep your eye on these principles, and consider revising the plan every few years. Your business priorities change, your messages to employees change -- so should your plans.